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The market yesterday was a write-off in terms of price action, as a few sovereign nations managed to squeeze in a national holiday in parts of Europe and in Canada. This week's U.S. fundamental highlight will be delivered tomorrow – the Federal Open Market Committee (FOMC) minutes from the May 1st meeting and U.S. Federal Reserve Chairman Ben “helicopter” Bernanke’s testimony on the Economic Outlook and Monetary Policy before the Joint Economic Committee, in Washington. On the whole, market price actions over the past few days indicate that investors are becoming a tad nervous ahead of Ben's speech.

Some investors are anticipating that the release of the FOMC minutes will indicate that both the Fed's 'hawks and doves' are beginning to become "increasingly uncomfortable with the current $85 billion a month asset purchase pace." The possibility of perhaps varying the monthly quantitative easing (QE) sizes may reduce the potential for an "outsized market reaction to any given adjustment." Ideally, it seems that investors are looking for confirmation of the expectations that the Fed is considering a reduction in asset purchases – the primary reason of late for the "mighty dollar" strength specifically against the antipodean currencies and Japanese Prime Minister Shinzo Abe's yen.

The main threat to the greenback’s gains may be the existing large speculative 'long' positions themselves. The current market environment, supported by a strong global equity market and easy monetary policies, has encouraged investors to add to their 'long' positions. Too much of a one directional play usually ends up with the weaker longs or shorts eventually being squeezed and causing minor market panic for a period.

Will Dollar Bulls Run Ahead of Ben?

There is a strong possibility that Bernanke will again disappoint the market with his testimony. It would not be a market surprise for Helicopter Ben to again "highlight the mixed tone of recent U.S. data, split between improving employment and rising risk of deflation." On the other hand, it should not come as a shock to see if spot forex (foreign exchange) tries to pre-play this scenario and allow the dollar a temporary "bull-run break" until all has been revealed. The heavier odds seem to favor Bernanke tempering expectation of QE tapering.

Over the next 24 hours the market gets the privilege to hear from a plethora of Fed speakers. With little market data to chew on, and with the ongoing market focus on the Fed’s next step, these speeches should attract a great deal of attention – investors are looking for clues and are trying to remain ahead of the Fed's yield curve.

Yesterday, Chicago Federal Reserve Bank President Charles Evans said in a speech that the U.S. economy has improved “quite a lot”, that he is optimistic that the labor market has been doing better (the Fed's primary concern), and unemployment is going to continue to go down. Despite wanting to digest a few more months’ worth of data, Evans seems “open minded” to discussing adjustment to the pace of bond buying at this meeting, or next. To date, he has been amongst the most vocal of supporters of QE. St. Louis Fed President James Bullard (voter and neutral), will speak on “Monetary Policy in a Low-Rate Environment” in Germany later this morning, while the New York Fed President William Dudley (voter and dovish) will speak about monetary policy challenges in his hometown.

U.K. Inflation Aids MPC

For a period, the dollar got a general boost from a weak U.K. Consumer Price Index (CPI) this morning. The year-over-year rate of headline CPI fell to +2.4% last month from +2.8% in March. Even the month-over-month +0.2% gain was much lower than expected and it has pushed both the retail price index and RPIX measures of inflation to below +3%. It's no surprise to see that the fall in prices was led by lower petrol prices. However, fundamentally it's been described as a broad-based decline in prices – and certainly something to keep the Bank of England happy. Policymakers have warned that any cooling in prices may be short-lived – "meaning a squeeze on U.K. residents incomes from meager wage growth and rising prices is set to intensify" – under this scenario, higher prices could threaten the fledgling U.K. recovery.

In general, softer global economic indicators and inflation supports low yields in the U.K., allowing the Monetary Policy Committee the flexibility to provide support to the U.K.'s apathetic recovery. GBP's (1.5179) sharp retrace lower after the inflation data will probably change most investors’ strategies. Day trend indicators are pointing south again, implying that investors should expect further sterling weakness.

On the weekend, Japan’s Economy Minister Akira Amari said a further slide in the yen would have negative effects after the currency’s +21% drop in the past six months, and he signaled concern at the prospect of higher bond yields. He said the government must demonstrate a commitment to fiscal rehabilitation to boost the credibility of government bonds. Approximately +50% of Japanese firms recently polled say the yen has fallen far enough, while +15% want to see a further decline and almost a third would prefer to see it bounce from its four-and-a-half-year decline. Close to +48% want USD/JPY to stabilize around ¥100, just +7% want yen to weaken to ¥105 and +8% want ¥110. The USD/JPY continues to hold below ¥103.10 for now, and a deeper setback remains favoured prior to the core uptrend resuming.

It's no surprise to see the 17-member single currency playing in no man’s land ahead of Bernanke's key testimony tomorrow. The EUR's weakness has stalled near-term, and a recovery is tentatively underway with single currency buyers appearing again at the overnight sessions lows. Macro accounts have been selling into the 1.2900-level while looping their profit buys around the 1.2880 mark. Real money buyers have appeared at the session lows, possibly related to Asian central banks’ rebalancing. Investors are expecting the EUR outright to retest the 1.2930 in the short-term. However, do not be surprised to see option related trades between large 1.2850 and 1.2900 expiries to make for a boring North American session.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.